VISUALIZING THE INVISIBLE AT WORK
Summary: Following from negative Q1 GDP and final sales (of domestic product), the BEA and BLS came together to find negative productivity, too. Though this is merely a remainder between series on output and hours, its history closely aligns with economic trends throughout. Productivity measures also aid in explaining those trends which otherwise have confounded policymakers and Economists. What these now negative numbers provide is more concrete backing for the sharply negative sentiment expressed all over, including today’s latest from the Fed itself.
MAX MFI UNCERTAINTY
Summary: European bank data showed another massive increase in MFIs already-considerable government bond holdings. That makes three straight months, with mid-2020 the only period with more. The only other two comparisons are 2009 and 2012. In short, European banks are up to something serious. Recession risk is one thing, but what unites each of these prior times is monetary deflation, with crisis proportions. In addition to examining those, also an update to America’s Beveridge Curve and how it aligns with plummeting consumer confidence.
IT ONLY SEEMS LIKE A PARADOX
Summary: Faced with a prospective global downturn buffeted by the possible reverse to a stock bubble , the risks of financial volatility are slightly elevated, to put it mildly. This unfortunately puts central banks on the spot and back in the spotlight and raises several questions. It’s not can they be effective if push comes to shove, rather was the central bank idea ever viable at any point? The theory has been tested thoroughly if only due to what at first seems to be the central bank paradox.
THE ONGOING BASIS TRADE FALLOUT
Summary: While repo and the Treasury market are calm again today, the issue of liquidations in the market continue to be raised. Officials are pointing to a “toolkit” which includes regulatory changes as well as rejiggering bond/note auctions to enhance, supposedly, buying power. Also, we look at the potential for a “hedge fund” bailout and just as importantly why no one will address the real problem as it is at its source. Finally, should more basis trade, reserve-manager selling erupt, we’ll examine what that might mean for rates and Treasuries overall.
TIC AND A LOT MORE
Summary: More from TIC. Deflationary signals deepened in both central eurodollar nodes, Japan and Europe. First, we begin with a lengthy historical review of both if to better illustrate how interconnected the world has been for as long as it has. In fact, the Japanese were the first documented sellers of Treasuries in order to fill in a eurodollar funding gap all the way back in 1963. With that context, the current TIC lending stats point to the same if larger and more global for 2024 and worse during the first two months of 2025. And that deflationary view is reaching multiple angles and dimensions.
MELTDOWNS AND LIQUIDATIONS
Summary: Meltdowns coming in from everywhere. Strong indications of liquidations, including those tied to Japan’s carry trade. Stocks served margin calls and risky credit getting pummeled therefore collateral calls. Yields falling sharply, as are forward rates in spite of Chair Powell’s latest attempt to portray calm and even the same inflation bias. And the “experts” have the dollar all wrong. Again.
FORGOTTEN GASOLINE
Summary: The ‘growth scare’ has come roaring back to the mainstream forefront. That only means the data is catching back up with gasoline. Wholesale gas prices have been the one straight constant over the past six to eight month. Whereas interest rates and stock prices, other financial indications have been back and forth, the fact RBOB has gone nowhere was the most profound signal out of quite a lot of that noise. This is hardly new, as energy warnings more broadly have repeatedly been dismissed at everyone’s peril.
KERNEL BILL
Summary: It didn’t take long for the FOMC’s QT adjustment to create an academic stir. And stir it did, stirring up an old argument still-popular on that side. One reason it remains out there is that it contains a kernel of very important truth. It is backed up by ongoing struggles by central banks and even stocks. One corner of the equity market, most of all. It all comes down to falling yields, both at the long end of the curve as well as right up front. Bills doing things and people are noticing.
NO ONE WINS THIS RACE
Summary: We weren’t supposed to see ultra-low interest rates again. The way it was told, they were a product of a bygone era left behind after the skillful handling of the pandemic. Not enough people appreciate just how close much of the world already is to historically low market and policy rates ALREADY. Even previously reluctant central bankers are heading fast in that direction. Next week, Switzerland is going to be debating a return to a zero interest rate. NEXT WEEK. Of the rest of the major central banks, they aren’t all that far behind and most of them are fast heading in that direction.
ANOTHER MEASURE OF ALTITUDE
Summary: GDPNow abruptly turned deeply negative at the end of last month. It was blamed on Swiss gold. While that part explains the depth of the negative, it doesn’t account for the full loss of GDP altitude. If anything, that loss is showing up in a wide variety of recession calls (rising probabilities) and downgraded growth expectations. Those downgrades seem relatively tame, from historical perspective if they hold true we will have experienced a full, traditional recession. There is no ambiguity in the data. Instead, this the GDP version of the Beveridge Curve - stall speed.
THE KING SPEECH
Summary: The past is prologue? There are a lot of similarities between now and 2024. In light of what Korea and Japan just reported, it’s worth going back to revisit six years ago, featuring one of the few honest (former) official reflections from that period. A reflection whose sentiment (pun very much intended) still stands to this day. In fact, that’s what all the incoming data keeps showing. Even before the latest “trade wars”, we’re seeing the same results from the last one.